Barefoot businessmen

SummaryMaitreesh Ghatak looks at detailed poverty studies and demolishes some conventional wisdom. The poor, he shows, are doughty entrepreneurs and small improvement in physical infrastructure and well-designed cash incentives can make dramatic improvements in their quality of life.

The poor, to paraphrase Hemingway’s well-known quip about the rich, are just like you and me, except they have less money. How much less? The 1990 World Development Report from the World Bank defines the extremely poor as an individual who lives on $1 or less a day (at the 1985 purchasing power parity exchange rate). This is close to poverty lines used by many countries (for example, the all India rural poverty line used by the Indian Planning Commission was Rs 328 per person per month, or $32 in PPP dollars in 1999-2000) and has become something of a standard measure.

The poor (as opposed to the extreme poor) are defined to be those who live on less than $2 per person per day. To put all this in perspective, the poverty line in the US works out to be something like $13 a day. How does someone live on $1 per person per day? Or for that matter, how does one live on $2 per person per day? What do they spend their money on? How do they earn their living? What kind of infrastructure do they have access to?

In a recent study, Abhijit Banerjee and Esther Duflo of MIT look at household level survey data from 13 countries, including India (listed in table 1), and describe the patterns of consumption and income generation of the extremely poor, as well as their access to markets and public goods.* This is based on the Living Standard Measurement Surveys (LSMS) of the World Bank, the Family Life Surveys by the Rand Corporation, and in the case of India, surveys carried out in the Udaipur district of Rajasthan, and in the slum areas of Hyderabad by the authors along with their collaborators.

While the surveys are not exhaustive or representative by any stretch, it is still a novel attempt to use household level data across countries to get a glimpse into the economic lives of the poor that remain hidden behind dry aggregate statistics such as what percentage of the population lives below the poverty line. What jumps out of the table is that there is considerable variation in living standards both within and across these countries: the poor are not a monolithic block. For example, within each country there is a fair bit of variation in terms